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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 Who Invests in Stocks?

Who Invests in Stocks?

Who buys stocks? Anyone can, although not nearly enough do. However, every type of person from every walk of life is free to jump in and try their hand. The real question is who buys stock well. The easy answer is almost no one. In fact, even professional money managers over time have proven en masse to be generally bad investors. 

They would call themselves Money Mismanagers, but it wouldn’t look as impressive on their office doors. If you can be one of the rare, truly educated investors, it will give you a huge jump on just about everyone else out there.

But there is always a new football season, hope always springs eternal, and Gary Busey always says something truly amazing. People will buy stocks. The lowliest buyer is typically a “retail buyer.” This is everyone from your paperboy who saves all summer to buy a hundred shares of Disney to sate his crush on Miley Cyrus, to your orthodontist who reads the WSJ every other day looking for a dental section which does not exist. It includes the blind widow down the street who throws darts to pick equities and it includes the millionaire astrologer who reads your palm for 15 untaxed bucks. The “retail” investor is a pejorative term on Wall Street. It typically means someone who is unschooled in the complex ways of investing, and it also implies someone who follows popular trends. They’re like those girls in high school who only started wearing those brown strappy shoes because the cool girls were wearing them. Over time, retail investors tend to buy at the high and sell at the low and generally get screwed. Just like the popular girls in high school. Don’t let this happen to you.

One rung up from retail investors are stockbrokers. Stockbrokers are people who make money by signing up clients and charging them fees to make investments for them. Stockbrokers are not incentivized to be successful investors; they are incentivized to gather clients. One would think that the two forces would be inexorably linked, but in practice good marketing trumps good performance over time. Apparently, American automobile manufacturers have taken up a similar line of thinking.

The next rung up

Above stockbrokers are professional money managers. These are investors who range from analysts at giant mutual fund complexes to individual hedge fund managers responsible for billions of dollars. These are what most call an institutional class of money manager, and within that class there is enormous variability in who is lucky and who is actually good. On Wall Street, most people define good as someone who has managed money successfully in both good times and bad, bull markets and bear, and has lived to tell about it. Managing money is an art form, not a science, and the quality of the job someone has done is only assessable over a period of decades. There are monkeys at the Bronx Zoo who, on a random scatter plot, have chosen stock categories and beaten Warren Buffett in a given year. Warren is the Tiger of the institutional investors’ world, minus the trailer park connections.

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